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Cash flow strategies and offshore investing advice

Discussion in 'Accounting, Tax & Legal' started by J_Lee, 18th Nov, 2016.

  1. J_Lee

    J_Lee Member

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    Hi all,

    I just found these forums, thought i would have to head over to the US forums for this stuff, but there is lots of great advice and information on here! I will digest as much as i can over the next 12 months but thought i might put this scenario out here now to get some initial direction.

    Here's my scenario;

    - You have 600-700k in capital, currently sitting in residential Investment properties
    - Your on 120k p/year income from your employer, the job has 18 months left in it before a redundancy occurs
    - After the redundancy, you wish to become a non-resident to travel and live abroad for the next 5 years on minimum of 2k p/month (after tax) but preferably 4k p/m
    - During this time you want to preserve your capital without diminishing the value (ie roll 2.5% back in to account for inflation) and live off the interest


    I've begun researching a cash flow strategy for my portfolio. I'm happy to sell off all my assets, car, furniture, IP's, etc and transition from 100% growth to 100% cash flow.

    The yield I receive will depend on my appetite for risk. My desired cash flow suggests I pursue high yielding investment products. My appetite for risk will be low to moderate. Assuming 700k capital, a 6% net yield average across the portfolio will pay me approx $3500 AUD p/m. This might be a good benchmark to aim for

    So far I'm looking into;

    p2p lending - 9% yield - medium to high risk, can be setup to only lend to A credit rated individuals, but it is unsecured lending

    short/mid term private lending - 10.5% yield - medium to high risk, I have a guy who does private lending, 3, 6 & 12 month terms, capital secured, guaranteed returns, option to roll over capital, interest paid monthly. The vehicle is a Discretionary Investment Fund

    LIC/ETF - broad market index funds - 10% ??? (4-8% yield ???) - low risk, looking into boglehead method and this is where I might park half or more my capital. Need to research this more, not sure what type of yields to expect

    Short term holiday apartment - 10%+ - low risk, Not sure i want to do this. Sick of managing property managers and this would involve a lot of interaction and would require an Australian tax presence. Would only look at this as a last case scenario if I could not get the yield/risk aversion I'm looking for by using the markets above


    Another consideration, is the legal structure I create to invest with. I have no real interest in the Australian markets. I would likely park most of my capital in the US and international markets. Having said this, I suppose it would be best to speak with someone, I'm under the impression I can avoid paying any tax to the ATO so long as i move my capital offshore, perhaps into a holding company in a tax haven

    Can anyone recommend international accountant or international tax solicitor ??? or direction any advice on the above scenario


    Cheers
     
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  2. Hodor

    Hodor Well-Known Member

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    I wouldn't call this type of investment property low risk. Capital loss can be very real as can vacancy periods and high management fees.

    Australian markets in general have high yields compared to other markets, such as the US. You mention chasing yield so look at what yields you get where.

    What do you see as the advantage of this? It has advantages as below,

    If you are looking at LICs/ETFs (Australian ones) then been an Aussie for tax purposes allows you to get franking credits which you can't as a foreigner.

    I like LICs, they are now where I am focusing my attention so I am bias here, they could suit your purposes and the Australian one's will give you franked dividends. Some of the big old ones can be picked up at a spot yield of 4.5% or 6.43% grossed up due to franking credits - about $45k a year pre tax on a $700k investment or around $38k post tax per the ATO website (assuming you are an Australian and can take advantage of the franking credits)

    Good luck. You have done well getting a nice asset base so far.
     
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  3. Gockie

    Gockie Member

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    My experience of holiday letting thus far has been pretty positive, but then again they are both in Sydney.
    Looking at 90% plus occupancy rates, substantial premium to normal rentals.

    I may start to do it interstate too - normal residential IP but using holiday letting to boost the yield. Note this strategy won't work in all areas though, and I'd stay away from areas that ONLY attract holidaymakers. If the economy changes or if there's new holiday apartments coming up, you may find it harder to attract people to stay at your property.

    It works near unis, hospitals, in suburbia... its surprising. Having transport and shops nearby is ideal.
     
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  4. Hodor

    Hodor Well-Known Member

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    Thanks NSW gal, I remember following your stories and it seems like you have a great system for management of your short term rentals. You prove that it can be done well and profitably. Still on the balance of things I would view thing type of investment as higher risk than other investment properties in general.

    Maybe I am just becoming boring.
     
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  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think you are correct in considering traditional holiday rentals in regional areas which are only in demand seasonally is a much higher risk.

    Considering that @Epping NSW gal has property in suburban Sydney, which is a very different game as the demand is not seasonal. She also has the option of reverting back to traditional letting, which properties in regional areas would have difficulty finding long term tenants for, so it's inherently less risky given the flexibility available.
     
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  6. J_Lee

    J_Lee Member

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    That's interesting, I am chasing a high yield but think there's an imminent crash coming out of china soon, with Aussie markets connected at the hip. I don't think we will fair as well as last time either. With this in mind I guess my (mostly uneducated) thoughts are leaning towards international markets.

    Thankyou for your tips I will move my research to these and use them as a baseline to compare other yields with LIC/ETF products

    I'm not apposed to staying an aussie resident but would much prefer to have my capital protected and the best form of protection might be to have it hidden. Although I wont be suprised if using this method doesnt come at a higher cost. Considering my (fairly small) amount of capital it may not be worth using an offshore arrangement.

    When i talk about risk I suppose I am mainly concerned with risk to capital, a 2 bed unit close to the beach/casino in mermaid beach/burleigh heads (Gold Coast) at around 350k purchase i would consider a low risk place to park 80k, but obviously there's more to the picture than just that
     
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  7. twisted strategies

    twisted strategies Well-Known Member

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    *** but think there's an imminent crash coming out of china soon ***

    the current Chinese growth rate , is long term bad , for everybody , BUT China is trying to slow that growth in positive constructive ways .

    i would not be surprised if the landing ( to less than 5% annual growth ) is bumpy , but China is NOT a democracy it has certain options other nations don't have .

    but an actual crash ( rather than a manufactured panic event ) i think not .

    HOWEVER the global economy is bigger than China ( alone ) and relying on China is a flawed strategy ... i would prefer to be more exposed to India , but have only a few tiny opportunities so far .

    nations like Mexico , India/Pakistan/Sri Lanka look obvious , but are there others ??

    a slowing China leaves room for growth elsewhere .

    my view of risk is .... if you have investment cash there,you have risk , Treasury bonds , property , even diamonds can lose capital value if forced to sell in a hurry
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Sure - if you're buying the type of property which could easily be converted to a long term rental and is likely to maintain its resale value then you have choices in case the holiday letting thing doesn't work out.

    If it's close to services and all the things normal tenants want, plus it's in an ideal holiday location, plus you think you can get good returns from it - then I think that's a lot less risky than the seasonal-only areas many people would look to buy a holiday rental.
     
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  9. J_Lee

    J_Lee Member

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    In regards to becoming an Australian non resident, the main advantage is a 0% tax rate if setup correctly. So long as you have no AU sourced income (along with no other 'ties' to residency) you need not lodge any tax return. Nor do you need to specifically live in the country to which you are a permanent resident (read; flag theory)

    Why not? Not sure what you mean by manufactured panic event..
    Have the Chinese not created a housing bubble not dissimilar to the US bubble in the years preceding 2007?
    Are they not inexorably connected to the US who, despite their 'best efforts' have not been able to stop another credit crisis emergence, this time with higher debt to GDP ratio?
    I surely don't know what it all means, but you sound smart if you can type it up without any spelling mistakes :D I am not an economist, all I can hope to do is assess which of these 'sky is falling' scenarios have the most merit, and then harden my assets against as many of those scenarios as much as reasonably practicable. I think its just as likely we will see a stagnated market for the next 15 years, but considering my wealth is moving into these markets, I won't take the luxury of assumption.

    I agree, and to counter this risk in the markets the smart investor should first and foremost look to asset allocation that mirrors his/her risk profile. Would you say? One theory I have noticed among those who attempt to live off the yield is to hold a 3 year living expense buffer in cash (or cash equivalent) The reining theory being; Every market crash (excluding the big one) has recovered within 3 years, and so long as you never have to sell in a hurry, as you put it, you never realize a loss

    I totally agree with that.

    With AU property market being so strong for so long and continuing to defy the odds it has been a hard decision to divest 100% out of what has garnered so much of my capital. However when I look back to the beginning of my investment career, and remember all the excellent posts on SS about LOE, Cash flow strats, and the other macro discussions on portfolio asset classes; it was always fairly clear and most would agree, property was/is an amazing way to grow your asset base (mainly due to leveraging + capital gains) but not necessarily such a strong contender once you have shifted into cash flow stage.

    My research into 'chasing the yield' is still very fresh. ATM I'm focusing on;
    REIT's - 5-8% yield - Possibly allocating into industry specific REIT's such as US healthcare or whatever industry is looking strong in the short-medium term
    High Yielding ETF's - ??? - Where do i start?
    DCT (Dogs of the Dow) - Need to read into this more

    Over the next couple of months I will focus on specific funds and asset allocation whilst setting up an internationalized structure. And I would encourage anyone who hasn't already politically diversified away from over-leveraged under-insured Australian banks to do the same

    thoughts?
     
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  10. twisted strategies

    twisted strategies Well-Known Member

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    China is NOT a democracy it can fill those cities in various ways , creating ( state-owned ) employment opportunities there, is the nice way , but there are others ( China might start selective immigration , and carefully select refugees ).

    China still can basically do what it damn well pleases ( even Putin has to be more clever on exercising his control )

    China has plenty of room to grow internally , and still maintains a firm control of it's currency ( which Trump has unwittingly tightened )

    Trump's 'leaning' on Iran will only strengthen China-Iran ties .

    the main danger to us all is if China starts to increase growth again
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Have a look at the stuff that @austing has been posting about ETFs and more specifically about his favourite topic, LICs ... lots of great info there to get you started.
     
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  12. twisted strategies

    twisted strategies Well-Known Member

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    *** manufactured panic event *** ( something like a Brexit or Trump election win )

    Xi ( or party ) could easily decide on a policy change that would startle the market ( but i very much doubt crash or wreck the market ) they have worked very hard to make China a world player in the global economy , and while nothing is hinted at ( unlike Putin's wealth ) you would assume they are rather wealthy via the crumbs left on the table )

    one REIT that you might not have spotted in INM ( or IRM.US ) it pays 3 monthly but has almost global exposure ( in he Western world ) ,
    ( i hold INM via the REC take-over )

    say as close to $A40 as you can

    ASX listed CMW is nice as well (under 98c a share if you can) ( i hold CMW )

    it pays 3 monthly as well

    ( DYOR )
     
  13. J_Lee

    J_Lee Member

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    @Simon Hampel - Thanks mate I have been reading his rants, good stuff there and over at PC

    @twisted strategies - Much appreciated, I'm looking at the REITs your have mentioned, I have a further 20 odd narrowed down and plan on analyzing some of them this week

    Seven months on, 2 investment property's sold and 2 to go.

    I've landed on a Dividend Growth Investing (DGI) (buy and hold long term internationally diversified stock portfolio) Following the philosphies of;
    Dividend Growth Investor
    Dividend Mantra - Helping you be a wise investor, smart spender, and frugal saver.
    Simply Safe Dividends - Safe Dividend Stocks & More
    http://www.thedividendguyblog.com/
    Dividend Hawk
    and a few others. To put simply, 35 equal weighted dividend growth stocks with streaks of 9 years or more, with asset allocation centered around shock proof consumer staple large multi-nationals

    I plan on physically moving overseas in 12 months, but legally leaving AU and becoming a non-resident sometime after that (to take advantage of zero tax flag theory strategy) However over the first 5-7 odd years, it will be best to take advantage of AU companies and their franking credits whilst my dividend income is still in the low tax bracket.

    Hence, my current strategy is to DCA approx 350k into international stocks over the next 12 months, at the 12 month mark my final property will be sold and I will lump some the final 300k (perhaps all of it into BKI) This is risky as I don't believe alot of AU companies have the ability to continue increasing their distributions for the long term. I'm finding solid DGI opportunities in the 4% gross range, so I'm hoping to offset that low yield with half my portfolio allocated to higher yielding AU stock

    For the record I'm chasing a 5.5% net yeild to produce a minimum of 36k after tax income off my 650k invested. I will also hold approx 200k cash, making my total allocation 75/25 - stock/cash

    I've now moved forward into researching specific shares, and attempting to navigate my way into a low cost nomadic banking solution.

    My plan thus far is to open an Interactive Brokers account and have dividends payed into a CitiBank mutli-currency account, which would hold 10k (minimum balance req) Considering I want 50k (2 years minimum living expenses) at all times, I'll need a separate interest earning and low cost transaction account, I have a meeting with Citibank setup, and plan on comparing them with a BankWest international setup.

    The other 150k I plan on holding in a fixed term account for a few years until I find overseas property to purchase.